Ambiguities cloud debate over carbon tax

Taxes have two consequences. They raise revenue and almost inevitably change our expenditure patterns. Both of these outcomes are often seen as positive by those who advocate a carbon tax.

A carbon tax is levied on the amount of carbon, a key element in carbon dioxide, that emits in the process of producing or using energy. The tax penalizes those who burn fossil fuels such as coal, oil and gas because it is levied on the number of metric tons of carbon each energy source produces.

Carbon taxes are designed to address the issue of “negative externalities.” When energy is used, whether it produces electricity, or for gasoline to power your car, pollutants escape into the atmosphere and create negative externalities. The cost of cleaning up those pollutants is not part of your monthly electrical bill, nor is it paid in the price you pay for gasoline. A carbon tax would increase the price of electricity and gas, thereby incentivizing consumers to engage in energy-saving behaviors, such as adjusting the thermostat, driving less and buying hybrid cars.

Many economists argue that if society wants to reduce air pollution and help lessen the effects of climate change, then a carbon tax is the best way to proceed by creating an incentive to use less energy. It is simple to administer and would reduce carbon emissions in a more efficient way than direct controls from the Environmental Protection Agency and other regulators. The carbon tax discussion is particularly important now because it appears that EPA regulations and enforcement will be reduced under Trump administration proposals.

Several provinces in Canada, as well as countries such as New Zealand, have carbon taxes. Why hasn’t the United States moved to establish a carbon tax? First of all, a carbon tax is just that, a tax. Raising taxes is not very popular, especially now. More specifically, many wonder where the proceeds from such a tax would be spent. Would they go to subsidize research on energy-saving technologies, as suggested by Sen. Bernie Sanders? Those familiar with some of the boondoggles that resulted from the grants given in the early years of the federal Energy Department shudder at that idea.

Perhaps, as some suggest, the proceeds from the new tax could make up revenue lost if a proposal to reduce corporate income taxes is enacted. As the United States currently has one of the highest corporate income taxes in the world, the net savings would help stimulate economic growth and create jobs. But some consider a carbon tax to be regressive because it disproportionately affects those with lower incomes. People who make this argument say that lower-income citizens pay a higher percentage of their income for energy and hence the tax is unfair.

Finally, there’s an important question of how such a tax would impact employment. A carbon tax might cause some firms to relocate out of the country and take jobs with them. This is why large producers of CO², such as Russia, China and the United States, have generally been reluctant to initiate carbon taxation. A carbon tax in the United States could hasten a shift in production of some kinds of energy — such as relatively high-polluting coal — to natural gas, thereby negatively impacting employment in some regions of the country.

For these and other reasons in 2014 Australia, one of the first countries to introduce a carbon tax, voted to eliminate it. In fact, Australia’s prime minister at the time, Tony Abbott, made the elimination of the tax of $2,260 per metric ton of carbon a major promise in his campaign, claiming it “damaged jobs, hurt families, didn’t help the environment.”

Carbon tax advocates promote it as an effective way to reduce pollutants. It may indeed be so, but as Australia proved, it is no panacea. Attractive as it may be to those who seek an easy answer to carbon pollution, like any other policy recommendation, it needs to be thoroughly examined to ascertain both its intended and unintended consequences. This is especially true given the wide variety of other taxes and policy proposals currently under consideration.

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